Commodities traders including Louis Dreyfus, Olam and Volcafe are pursuing legal action against hundreds of Brazilian coffee farmers whose failure to deliver on pre-agreed sales has left the merchants exposed to losses, according to sources and documents seen by Reuters.
Arabica coffee prices have rallied some 60% this year due to climate turmoil in Brazil. The price surge has tempted farmers to default on sales, tightening supply in a commodity that, like many others, has been affected by shipping delays and reduced availability of labor.
All three of the world's largest arabica producers - Brazil, Colombia, and Ethiopia - are experiencing increased rates of default, where farmers fail to deliver coffee at agreed-upon prices so they can attempt to re-sell at current higher prices.
Lawyers told Reuters this is the first time in decades that scores of coffee farmers are defaulting in Brazil, which grows about half the world's arabica beans. Defaults have spiked in other commodities like soybeans, where merchants have resorted to using satellites and deployed lawyers to go after farmers who tried to resell already guaranteed crops, as prices in that market, too, spiked.
Many court proceedings in Brazil are not public.
Volcafe, the coffee trading arm of ED&F Man, one of the world's largest commodity trading firms, has had problems with about 5% of its contracts in Brazil, according to the company's North and South America director, Nicolas Rueda.
"We managed to negotiate and find a solution in most cases. Only in cases when talks ceased we resorted to the courts," he said, without identifying the number of cases the firm was working on.
Olam confirmed cases of non-compliance and legal action but said they are not widespread. Louis Dreyfus did not return a request for comment.
Farmers are also defaulting in Colombia and Ethiopia, the world's second and third largest arabica producers. With Brazil, the three countries account for more than two-thirds of global arabica output.
"The incentive to default has never been higher (and) these guys are not just defaulting on one (season's) crop. You're looking at the tip of an iceberg here. It will get worse over next 12 months or longer," said a Europe-based trader at one of the world's largest coffee traders, who was not authorized to speak on the record.
Forward sales volumes in Brazil have plunged due to both defaults and severe shipping backlogs, said two other global traders, exacerbating already tight global coffee supplies.
The high rate of defaults could push futures, already near seven-year peaks, up further as the market depends on forward selling from Brazil to temper price rises, said a second Europe-based trader at a global merchant.
"There should be a continuous flow of (sales) from Brazil but everything's shut down. Its scary how quiet it is. We can't buy coffee. Our middleman can't get his coffee," he said.
"Put together with (shipping) issues, the defaults mean the availability of coffee in the U.S., Europe and Japan is getting more and more tenuous," he said.
Evidence of the tightness can already be seen in ICE exchange stocks , which have fallen some 11% over the past month alone. The stocks are a cheap and reliable supply source relative to the physical market.
Law firm Santos Neto Advogados is working on about 30 lawsuits related to coffee defaults, said Fernando Bilotti Ferreira, a partner at the firm. He said he is acting on behalf of four trading houses but declined to name them.
The size of the defaults vary from 500 bags to as high as 4,500 bags. At current market prices, a contract for 4,500 bags would be worth around 5.8 million reais ($1.03 million).
Many traders involved in court cases have been accepting farmers' requests to postpone deliveries into 2022, said Cristiano Zauli, a lawyer working in Minas Gerais, Brazil's largest coffee producing state. He has been involved in around 100 court cases in coffee this year and acted as a mediator in hundreds more pre-trial talks, he said.
Zauli declined to identify his clients.
Buyers who filed court cases are seeking legal orders allowing them to get their coffee from farms with the help of law enforcement officers, according to court documents in the states of Sao Paulo and Minas Gerais.
In one case, trader Olam had to go to two different locations to find the 750 bags it had bought from a farmer in Alfenas, Minas Gerais.
In another, Louis Dreyfus was trying to find 1,000 bags it bought from a farmer in Patrocinio, another Minas Gerais municipality. The trader's lawyer told the judge that the farmer re-sold the coffee to a local merchant, where it was delivered, according to the legal filings.
Two local Brazilian coffee brokers told Reuters defaults have hit practically all market participants, including coffee co-op Cooxupe, the country's top exporter.
Cooxupe said it normally negotiates with farmers facing problems but added it cannot "treat associated farmers differently," meaning the rules apply to all.
($1 = 5.6146 reais)